Question

Thomas Consultants provided Bran Construction with assistance in implementing various cost-savings initiatives. Thomas’s contract specifies that it will receive a flat fee of $67,000 and an additional $37,000 if Bran reaches a prespecified target amount of cost savings. Thomas estimates that there is a 30% chance that Bran will achieve the cost-savings target. Required: 1. Assuming Thomas uses the expected value as its estimate of variable consideration, calculate the transaction price. 2. Assuming Thomas uses the most likely value as its estimate of variable consideration, calculate the transaction price. 3. Assume Thomas uses the expected value as its estimate of variable consideration, but is very uncertain of that estimate due to a lack of experience with similar consulting arrangements. Calculate the transaction price.

Answer 1

1. $104,000 ($67,000 fixed fee + 37,000 bonus) x 30% = 31,200

$67,000 ($67,000 fixed fee + 0 bonus) x 70% = 46,900

$31,200 + $46,900 = $78,100

2. The most likely amount is the flat fee of $67,000, because there is a greater chance of not qualifying for the bonus.

3. Thomas is very uncertain of its estimate, however he can't argue that it won't have a significant amount of revenue in the future. Thomas would not include the bonus estimate, and the transaction fee would be the flat fee of $67,000